Who's Above the Social Security Payroll Tax Cap?

September 2011, Nicole Woo, Janelle Jones and John Schmitt

When most workers look at their pay stubs, they can see that the Social Security payroll tax rate is 12.4 percent – with the employee and employer each paying 6.2 percent. But many workers do not know that any annual wages above $106,800 are not taxed by Social Security. In other words, a worker who makes twice the Social Security wage cap – $213,600 per year – pays Social Security tax on only half of his or her earnings, and one who makes just over a million dollars per year pays the tax on only about a tenth.

Raising the Social Security cap – which would make some or all earnings above $106,800 subject to the Social Security tax – has gotten some attention as a way to help alleviate Social Security’s long-term budget shortfall. U.S. Senator Bernie Sanders plans to introduce legislation to keep the current cap at $106,800, but to also apply the Social Security payroll tax to earnings over $250,000. It is similar to previous bills and echoes a proposal by then-Senator Obama on the campaign trail in 2008. While this would leave those making between the current cap of $106,800 and the proposed cap of $250,000 paying the lowest rates, it would help secure the solvency of the program and avoid an increase in taxes on the middle class.

To help inform this policy debate, this paper examines Census Bureau data from the most recently available American Community Survey to determine how raising the cap would affect workers based on gender, race or ethnicity, age, and state of residence.